china and the global economy...singapore, thailand, and vietnam--+ 3 (china including hong kong,...
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China and the Global EconomyLawrence J. Lau
Ralph and Claire Landau Professor of Economics, The Chinese University of Hong Kong
And
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University
The 7th Advanced Programme for Central Bankers and Regulators
The Lau Chor Tak Institute of Global Economics and Finance
The Chinese University of Hong Kong
Hong Kong, 15 March 2019
Tel: +852 3943 1611; Fax: +852 2603 5230
Email: [email protected]; WebPages: www.igef.cuhk.edu.hk/ljl
*All opinions expressed herein are the author’s own and do not necessarily reflect the views of any of the
organisations with which the author is affiliated.
2
Outline Introduction—The Current State of the Chinese Economy
Global Economic Trends
The Future of Economic Globalisation
The China-U.S. Trade War
Projections of the Future
Concluding Remarks
Introduction The Chinese economy has been growing without interruption at an
average annual real rate of almost 10 percent since 1978, even though it has slowed down to an average rate of growth of around 6.5 percent in more recent years. Chinese GDP grew from US$358 billion in 1978 to US$13.1 trillion in 2018 (in 2018 prices and exchange rate), almost 37 times, to become the second largest economy in the world, with two-thirds of the GDP of the largest economy, the United States.
Chinese real GDP per capita grew from US$372 in 1978 to US$9,415 in 2018 (in 2018 prices), at an average annual rate of over 8 percent, without any interruption, achieving a more than 25-fold increase. Even then, China as a country still only ranked below seventieth in terms of real GDP per capita in the world. And its real GDP per capita is still less than one-sixth of the U.S. real GDP per capita, which exceeds US$60,000.
3
Chinese Real GDP and Its Annual Rate of
Growth since 1949 (trillion 2018 US$ & %)
4
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
24
28
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
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1970
1971
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1976
1977
1978
1979
1980
1981
1982
1983
1984
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1989
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1991
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1994
1995
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Percent
US$
tri
llion
s, 2
018
pri
ces
Chinese Real GDP and Its Rates of Growth since 1949
(trillion 2018 US$ and percent)
Rates of Growth of Chinese Real GDP (right scale)
Chinese Real GDP, in 2018 prices
Chinese Real GDP per Capita and Its Annual
Rate of Growth (thousand 2018 US$ & %)
5
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
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1971
1972
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1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Percent
US$
tho
ousa
nds,
201
8 p
rice
s
Chinese Real GDP per Capita and Its Rate of Growth since 1949
(thousand 2018 US$ and percent)
Rates of Growth of Chinese Real GDP per Capita (right
scale)
Chinese Real GDP per capita, in 2018 prices
IntroductionResearchers at the International Monetary Fund (IMF) and
the World Bank have found, on the basis of “purchasing-power-parity (PPP)” calculations, that the Chinese economy overtook the U.S. economy in 2014.
However, PPP comparisons of GDPs between economies are not reliable because they are highly sensitive to the set of so-called “international prices” chosen to evaluate the goods and services produced in the different economies. The choice of prices can affect the resulting estimates of the PPP GDPs greatly, especially because of the valuation of the non-tradable goods and services, the actual prices of which can differ significantly internationally due to differences in natural resource endowments such as land and minerals and in consumer preferences.
6
77
Quarterly Rates of Growth of Chinese Real
GDP, Y-o-Y
-5%
0%
5%
10%
15%
20%
25%
1983q
11983q
31984q
11984q
31985q
11985q
31986q
11986q
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11991q
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11995q
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31998q
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32000q
12000q
32001q
12001q
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12003q
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32005q
12005q
32006q
12006q
32007q
12007q
32008q
12008q
32009q
12009q
32010q
12010q
32011
q1
2011
q3
2012q
12012q
32013q
12013q
32014q
12014q
32015q
12015q
32016q
12016q
32017q
12017q
32018q
12018q
3
Per
cen
t p
er a
nn
um
Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y
GDPQ1 GDPQ2
GDPQ3 GDPQ4
Monthly Rates of Growth of Real Value-Added
of the Chinese Industry, Y-o-Y
8
0
5
10
15
20
25
Jan
-95
Ap
r-95
Ju
l-95
Oct
-95
Jan
-96
Ap
r-96
Ju
l-96
Oct
-96
Jan
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Ap
r-97
Ju
l-97
Oct
-97
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Ap
r-98
Ju
l-98
Oct
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Jan
-99
Ap
r-99
Ju
l-99
Oct
-99
Jan
-00
Ap
r-00
Ju
l-00
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-00
Jan
-01
Ap
r-01
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l-01
Oct
-01
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-02
Ap
r-02
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l-02
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-02
Jan
-03
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r-03
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l-03
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-03
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-04
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r-05
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-05
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-07
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-08
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Ap
r-09
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Oct
-09
Jan
-10
Ap
r-10
Ju
l-10
Oct
-10
Jan
-11
Ap
r-11
Ju
l-11
Oct
-11
Jan
-12
Ap
r-12
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l-12
Oct
-12
Jan
-13
Ap
r-13
Ju
l-13
Oct
-13
Jan
-14
Ap
r-14
Ju
l-14
Oct
-14
Jan
-15
Ap
r-15
Ju
l-15
Oct
-15
Jan
-16
Ap
r-16
Ju
l-16
Oct
-16
Jan
-17
Ap
r-17
Ju
l-17
Oct
-17
Jan
-18
Ap
r-18
Ju
l-18
Oct
-18
%
Monthly Rates of Growth of Real Value-Added of the Chinese Industry, Year-over-Year
Global Economic TrendsThere are four important developments in the global
economy during the past four decades. They are: (1) The reform and opening of the Chinese economy and its
participation in the world since 1978, enhancing both global supply of and demand for goods and services;
(2) Economic globalisation, increasing international trade, direct investment and portfolio investment around the world;
(3) The fragmentation of production, made possible by advances in information and communication technology, giving rise to widely dispersed international supply chains and international division of labour; and
(4) The rise of the internet economy as a marketplace for both sellers and buyers. 9
Global Economic TrendsThese developments have resulted in: The centre of gravity of the global economy, in terms of both
GDP and international trade, has been gradually shifting from North America and Western Europe to East Asia and South Asia, and within East Asia from Japan to China. The shift is still on-going, with both China and India being currently the fastest-growing economies in the world.
Close to 1 billion people worldwide (740 million in China alone) have been lifted out of poverty as a result of this economic globalisation.
The internet economy augments the variety of choices, increases competition and reduces transaction costs, including search costs.
Each and every economy has benefitted in the aggregate.10
Global Economic TrendsHowever, while each and every economy has benefitted
in the aggregate, this economic globalisation has created
both winners and losers within each economy. But these
losers have not shared in the benefits and have not been
adequately compensated. This is the source of the anger
and frustration in many developed economies around the
world.
Can economic globalisation continue in the future?
Without continuing globalisation, can the currently
developing economies become developed?11
Global Economic Trends: The Shifting Center
of Gravity of the Global Economy In 1970, the United States and Western Europe together
accounted for almost 60% of world GDP. By comparison, East Asia (defined as the 10 Association of Southeast Asian Nations (ASEAN)--Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam--+ 3 (China including Hong Kong, Macau and Taiwan, Japan and the Republic of Korea)) accounted for only approximately 10% of world GDP.
Hong Kong, the Republic of Korea, Singapore and Taiwan are also known collectively as the East Asian “Newly Industrialised Economies (NIEs)”. 12
Global Economic Trends: The Shifting Center
of Gravity of the Global Economy
By 2017, the share of United States and Western Europe
combined in world GDP has declined to approximately
40% whereas the share of East Asia has risen to around
28%.
The Japanese share of world GDP declined from a peak
of almost 18% in the mid-1990s to 6.0% in 2017 while
the Mainland Chinese share of world GDP rose from
3.1% in 1970 and less than 4% in 2000 to over 15.1% in
2017.
13
The Distribution of World GDP, 1970 and
2017, US$
14
Brunei
0.0%
Cambodia
0.0%
Mainland China
3.1% Hong Kong
0.1%
Indonesia
0.3%
Japan
7.1%
Korea
0.3% Lao
0.00%Macao
0.0%Malaysia
0.1%
Myanmar
0.1%Philippines
0.2%Singapore
0.1%Thailand
0.2%Vietnam
0.1%
Taiwan, China
0.2%
United States
36.4%
Euro Zone
21.7%
Other Economies
29.8%
1970
Brunei
0.0% Cambodia
0.0%
Mainland China
15.1%
Hong Kong
0.4%
Indonesia
1.2%
Japan
6.0%Korea
1.9%Lao
0.02%
Macao
0.1% Malaysia
0.4%
Myanmar
0.1%
Philippines
0.4%
Singapore
0.4%
Thailand
0.6%
Vietnam
0.3%
Taiwan, China
0.7%
United States
23.9%Euro Zone
15.7%
Other Economies
33.0%
2017
The Shares of East Asia, China, Japan and
South Korea in World GDP, 1960-present
150
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cen
t
The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present
East Asian Economies
Mainland China
Japan
Korea
Global Economic Trends: The Shifting Center
of Gravity of the Global Economy In 1970, the United States and Western Europe together
accounted for almost 47% of world trade in goods and services. By comparison, East Asia accounted for 9.5% of world trade.
By 2017, the share of United States and Western Europe combined in world trade has declined to 36.5% whereas the share of East Asia has risen to almost 27.8%.
The Mainland Chinese share of world trade rose from 0.6% in 1970 to 10.2% in 2017. The growth in Chinese international trade may be attributed in part to adoption of current-account convertibility of the Renminbi by China in 1994, accompanied by a significant devaluation of the Renminbi, and to Chinese accession to the World Trade Organisation (WTO) in 2001.
Since 2015, Mainland China has also been the largest trading-partner country of the U.S., surpassing Canada.
16
17
The Distribution of International Trade in
Goods and Services, 1970 and 2016
17
Brunei
0.0%
Cambodia
0.1%
China
10.1%
Hong Kong
2.9%Indonesia
0.8%
Japan
3.8%
Korea
2.7%
Lao PDR
0.0%Macao
0.1%
Malaysia
0.9%
Philippines
0.5%
Singapore
2.3%Thailand
1.2%
Vietnam
0.9%
Taiwan, China
1.6%
United States
12.0%
Euro Zone
25.2%
Other Economies
34.8%
2016
Brunei
0.0%
Cambodia
0.0%
China
0.6%
Hong Kong
0.9%
Indonesia
0.4%
Japan
5.5%
Korea
0.4%
Lao PDR
0.0%
Macao
0.0%
Malaysia
0.4%
Philippines
0.4%
Singapore
0.7%
Thailand
0.3%
Vietnam
0.0%Taiwan, China
0.0%
United States
14.6%
Euro Zone
32.4%
Other Economies
43.3%
1970
18
The Rising Share of East Asian Trade in Total
World Trade, 1960-present
6
8
10
12
14
16
18
20
22
24
26
28
30
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Perc
ent
The Rising Share of East Asian Trade in Total World Trade, 1960-present
Share of World Exports
Share of World Imports
Share of Total World Trade
19
The Distribution of the Market Capitalization
of World Stock Exchanges by Region, percent
0
5
10
15
20
25
30
35
40
45
50
55
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
The Distribution of the Market Capitalization of World Stock Exchanges by Region, percent
East Asian and South Asian Stock Exchanges
U.S. Stock Exchanges
European Stock Exchanges
The Shifting Center of Gravity of the Global
Economy: The Partial De-Coupling Hypothesis Throughout the 2007-2009 global financial crisis, as well as the
subsequent European sovereign debt crisis, the East Asian economies continued to do reasonably well. Mainland China, in particular, has been able to maintain its real rate of growth above 6.5% since 2007, lending credence to the “Partial De-Coupling Hypothesis”, that is, the East Asian economies can continue to grow, albeit at lower rates, even as the U.S. and European economies go into economic recession.
This partial de-coupling can occur because of the shift of the economic centre of gravity of the world from the United States and Western Europe to Asia (including both East Asia and South Asia) over the past four decades.
20
The Shifting Center of Gravity of the Global
Economy: The Partial De-Coupling Hypothesis A particularly interesting development is the rise in intra-East
Asian international trade. The share of East Asian exports destined for East Asia accounts for 50 percent of total East Asian exports at the present time. This is a sea-change compared to 30 years ago when most of the East Asian exports were destined for either the United States or Western Europe.
Similarly, the share of East Asian imports originated from East Asia has also stayed around 50 percent.
21
Lawrence J. Lau, The Chinese University of Hong Kong 22
The Share of East Asian Exports
Destined for East Asia
38
40
42
44
46
48
50
52
54
Jan
/98
Ap
r/98
Jul/9
8O
ct/9
8Ja
n/9
9A
pr/
99Ju
l/99
Oct
/99
Jan
/00
Ap
r/00
Jul/0
0O
ct/0
0Ja
n/0
1A
pr/
01Ju
l/01
Oct
/01
Jan
/02
Ap
r/02
Jul/0
2O
ct/0
2Ja
n/0
3A
pr/
03Ju
l/03
Oct
/03
Jan
/04
Ap
r/04
Jul/0
4O
ct/0
4Ja
n/0
5A
pr/
05Ju
l/05
Oct
/05
Jan
/06
Ap
r/06
Jul/0
6O
ct/0
6Ja
n/0
7A
pr/
07Ju
l/07
Oct
/07
Jan
/08
Ap
r/08
Jul/0
8O
ct/0
8Ja
n/0
9A
pr/
09Ju
l/09
Oct
/09
Jan
/10
Ap
r/10
Jul/1
0O
ct/1
0Ja
n/1
1A
pr/
11Ju
l/11
Oct
/11
Jan
/12
Ap
r/12
Jul/1
2O
ct/1
2Ja
n/1
3A
pr/
13Ju
l/13
Oct
/13
Jan
/14
Ap
r/14
Jul/1
4O
ct/1
4Ja
n/1
5A
pr/
15Ju
l/15
Oct
/15
Jan
/16
Ap
r/16
Jul/1
6O
ct/1
6Ja
n/1
7A
pr/
17Ju
l/17
Oct
/17
Jan
/18
Ap
r/18
%
The Share of East Asian Exports Destined for East Asia
Lawrence J. Lau, The Chinese University of Hong Kong 23
The Share of East Asian Imports
Originated from East Asia
42
44
46
48
50
52
54
56
58
Jan
/98
Ap
r/98
Jul/9
8O
ct/9
8Ja
n/9
9A
pr/
99Ju
l/99
Oct
/99
Jan
/00
Ap
r/00
Jul/0
0O
ct/0
0Ja
n/0
1A
pr/
01Ju
l/01
Oct
/01
Jan
/02
Ap
r/02
Jul/0
2O
ct/0
2Ja
n/0
3A
pr/
03Ju
l/03
Oct
/03
Jan
/04
Ap
r/04
Jul/0
4O
ct/0
4Ja
n/0
5A
pr/
05Ju
l/05
Oct
/05
Jan
/06
Ap
r/06
Jul/0
6O
ct/0
6Ja
n/0
7A
pr/
07Ju
l/07
Oct
/07
Jan
/08
Ap
r/08
Jul/0
8O
ct/0
8Ja
n/0
9A
pr/
09Ju
l/09
Oct
/09
Jan
/10
Ap
r/10
Jul/1
0O
ct/1
0Ja
n/1
1A
pr/
11Ju
l/11
Oct
/11
Jan
/12
Ap
r/12
Jul/1
2O
ct/1
2Ja
n/1
3A
pr/
13Ju
l/13
Oct
/13
Jan
/14
Ap
r/14
Jul/1
4O
ct/1
4Ja
n/1
5A
pr/
15Ju
l/15
Oct
/15
Jan
/16
Ap
r/16
Jul/1
6O
ct/1
6Ja
n/1
7A
pr/
17Ju
l/17
Oct
/17
Jan
/18
Ap
r/18
%
The Share of East Asian Imports Originated from East Asia
The Share of East Asian Exports Destined for E. Asia &
the Share of E. Asian Imports Originated from E. Asia
34
36
38
40
42
44
46
48
50
52
54
56
58
60
Ja
n/9
8A
pr/
98
Ju
l/9
8O
ct/9
8Jan
/99
Ap
r/99
Ju
l/99
Oct
/99
Jan
/00
Ap
r/00
Ju
l/00
Oct
/00
Ja
n/0
1A
pr/
01
Ju
l/0
1O
ct/0
1Jan
/02
Ap
r/02
Ju
l/02
Oct
/02
Jan
/03
Ap
r/03
Ju
l/0
3O
ct/0
3J
an
/04
Ap
r/0
4J
ul/0
4O
ct/0
4Jan
/05
Ap
r/05
Ju
l/05
Oct
/05
Jan
/06
Ap
r/0
6J
ul/0
6O
ct/0
6J
an
/07
Ap
r/0
7Ju
l/07
Oct
/07
Jan
/08
Ap
r/08
Ju
l/08
Oct
/08
Jan
/09
Ap
r/0
9J
ul/0
9O
ct/0
9J
an
/10
Ap
r/1
0Ju
l/10
Oct
/10
Jan
/11
Ap
r/11
Ju
l/11
Oct
/11
Ja
n/1
2A
pr/
12
Ju
l/1
2O
ct/1
2J
an
/13
Ap
r/13
Ju
l/13
Oct
/13
Jan
/14
Ap
r/14
Ju
l/14
Oct
/14
Ja
n/1
5A
pr/
15
Ju
l/1
5O
ct/1
5J
an
/16
Ap
r/16
Ju
l/16
Oct
/16
Jan
/17
Ap
r/17
Ju
l/17
Oct
/17
Ja
n/1
8A
pr/
18
%
The Share of East Asian Exports Destined for East Asia
and The Share of East Asian Imports Originated from East Asia
The Share of East Asian Imports Originated from East Asia
The Share of East Asian Exports Destined for East Asia
25
Global Economic Trends: The Slowdown in
the Growth of GDP,Trade & Direct Investment Both total real world trade and total world foreign direct investment
have grown much faster than total real world GDP since 1970.
Between 1970 and 2008, the beginning of the most recent global
financial crisis, total real world GDP grew at an average annual rate of
3.3% while total real world trade grew at an average annual rate of
5.5%.
However, since the global financial crisis that began with the U.S.
sub-prime loan crisis in 2007, the average annual rates of growth of
real world GDP and real world trade have declined to 2.2% and 2.5%
respectively. The recent fall in the nominal value of total world trade
is due in part to the fall in the world price of oil.
2017 turned out to be the best year for the developed economies—the
U.S., the European Union and Japan—in a decade.
26
Real World GDP and Trade in Goods and
Services and Their Growth Rates (2017 prices)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
-60
-55
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
PercentU
SD t
rilli
ons,
in
2016
pri
ces
World Real GDP and Real Total Trade and Their Growth Rates, in 2017 prices
Rates of Growth of World Total Trade in Goods and Services (right axis)
Rates of Growth of World GDP (right axis)
World Real Total Trade in Goods and Services
World Real GDP
Global Economic Trends: The Slowdown in
the Growth of GDP,Trade & Direct Investment It is unlikely that the world economy as a whole would resume its
heady rates of growth in GDP and trade that it achieved prior to
the global financial crisis of 2008 in a sustained manner.
Cross-border trade and direct investment are no longer the major
drivers of world economic growth.
Protectionism, isolationism, nationalism and populism are rearing
their heads and the entire world faces the risks of trade wars and
economic de-globalisation.
27
Global Economic Trends: The Slowdown in
the Growth of GDP,Trade & Direct Investment Total world trade as a percent of total world GDP increased from
26% in 1970 to 62% in 2008, but it has since stalled and has
begun a gradual decline.
The total values of international trade of the United States and
China, the two largest economies and also the two largest trading
economies in the world, have declined in both 2015 and 2016.
However, 2017 saw a rebound in the growth of world trade, but it
was probably due, in part, to the recovery from a low base.
Economic globalisation has reached a turning point. Is it likely to
be reversed in the future?
28
29
Total World Trade in Goods and Services as a
Percentage of World GDP since 1960
20
24
28
32
36
40
44
48
52
56
60
64
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Pec
ent
Total World Trade in Goods and Services as a Percentage of World GDP since 1960
Chinese and U.S. International Trade and Their
Respective Rates of Growth since 1970 (US$)
30
-20
-10
0
10
20
30
40
50
60
-2
-1
0
1
2
3
4
5
6
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
perc
ent
US$
bill
ion
Chinese and U.S. International Trade (US$) and Their Rates of Growth since 1970
Rate of growth of total Chinese international trade, % (right scale)
Rate of growth of total U.S. international trade, % (right scale)
Total Chinese trade in goods and services (US$ trillions)
Total U.S. trade in goods and services (US$ trillions)
Global Economic Trends:
Foreign Direct Investment (FDI) Falling barriers to as well as incentives for foreign direct investment (FDI)
provided by investee countries have also greatly increased cross-border direct investment. National treatment for foreign direct investment is becoming increasingly standard under the World Trade Organisation (WTO) and similar agreements.
Data from the United Nations Commission for Trade and Development (UNCTAD) show that total world FDI increased at the average annual rate of 14% between 1970 and 2007, the beginning of the global financial crisis. Annual total world FDI may be estimated at approximately US$1.9 trillion in 2007. Since 2007 total world FDI has been declining by 1% per year.
The U.S. and Mainland China are the world’s top two leading recipients of foreign direct investment (FDI) with an annual average of approximately US$100 billion currently. They are also the top two outbound direct investors.
Foreign direct investments (FDI) often follow trade—e.g., to secure long-term supply of raw materials and natural resources; and trade often follows foreign direct investments—e.g., production by captive subsidiaries in foreign markets. A large proportion of world trade consists of intra-industry and intra-firm trade.
International capital flows also include portfolio investment, foreign aid, foreign loans and short-term capital flows such as “hot money”. 31
Total World Foreign Direct Investment (FDI),
US$ since 1970
320
500
1,000
1,500
2,000
2,500
3,000
3,500
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
USD
bill
ions
World Foreign Direct Investment since 1970, Net Inflows, US$ billions
33
Global Economic Trends:
The Limits of Monetary Policy The experiences of the quantitative easing policies undertaken by the
U.S. Federal Reserve Board, the Bank of Japan, the European Central Bank (ECB) and other central banks since late 2008 confirm what should have been well known all along—that monetary policy alone cannot turn a depressed economy around. Low interest rates cannot overcome the effects of negative expectations about the future. If expectations about the future of the economy are poor, firms will not make new investments and households will reduce their consumption no matter how low the interest rate becomes, even if it turns negative. Moreover, such expectations can be self-fulfilling.
The U.S., Japan and many of the European countries have been stuck in a classic “liquidity trap”. As the saying goes: “One can pull on a string, but not push on a string”. Monetary policy or quantitative easing is powerless when faced with a low level of confidence about the future of the economy.
34
Global Economic Trends:
The Limits of Monetary Policy In addition, zero or negative interest rates create asset price
bubbles, which will eventually burst, with damaging
consequences. They also have serious negative effects on the
income and wealth distribution and impose hardships on the net
savers of the economy--the middle- and lower-income
households, and especially the retired elderly.
The truth is that easy monetary policy has not worked too well to
revive the economies, and should have never been expected to
work by itself alone.
Interest rates worldwide are expected to be normalised in the next
couple of years, led by the U.S. Federal Reserve Board.
35
Global Economic Trends:
The World Price of Oil The world price of oil fell between 2014 and 2016. It has rebounded
somewhat since. In real terms it is slightly higher then where it was before its spectacular rise in 2004.
Overall, the fall in the world price of oil has to be regarded as a net positive factor for the world economy as a whole.
The world price of oil is not really determined by world supply and demand alone. The world oil market is an oligopolistic market. The largest producer in the world, Saudi Arabia, has the capacity of producing at least 25 percent more if it chooses to do so.
However, given the advances in shale oil fracturing technology (“fracking”) and the abundant potential supply in the U.S., now the largest oil producer in the world, which can be tapped in a matter of months, it is unlikely that the world price of oil will stay above US$60 a barrel for a long time.
36
The Nominal and Real World Prices of Oil
(2017 prices)
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
Jan
-74
Jul-
74Ja
n-7
5Ju
l-75
Jan
-76
Jul-
76Ja
n-7
7Ju
l-77
Jan
-78
Jul-
78Ja
n-7
9Ju
l-79
Jan
-80
Jul-
80Ja
n-8
1Ju
l-81
Jan
-82
Jul-
82Ja
n-8
3Ju
l-83
Jan
-84
Jul-
84Ja
n-8
5Ju
l-85
Jan
-86
Jul-
86Ja
n-8
7Ju
l-87
Jan
-88
Jul-
88Ja
n-8
9Ju
l-89
Jan
-90
Jul-
90Ja
n-9
1Ju
l-91
Jan
-92
Jul-
92Ja
n-9
3Ju
l-93
Jan
-94
Jul-
94Ja
n-9
5Ju
l-95
Jan
-96
Jul-
96Ja
n-9
7Ju
l-97
Jan
-98
Jul-
98Ja
n-9
9Ju
l-99
Jan
-00
Jul-
00Ja
n-0
1Ju
l-01
Jan
-02
Jul-
02Ja
n-0
3Ju
l-03
Jan
-04
Jul-
04Ja
n-0
5Ju
l-05
Jan
-06
Jul-
06Ja
n-0
7Ju
l-07
Jan
-08
Jul-
08Ja
n-0
9Ju
l-09
Jan
-10
Jul-
10Ja
n-1
1Ju
l-11
Jan
-12
Jul-
12Ja
n-1
3Ju
l-13
Jan
-14
Jul-
14Ja
n-1
5Ju
l-15
Jan
-16
Jul-
16Ja
n-1
7Ju
l-17
Jan
-18
Jul-
18Ja
n-1
9
U.S
. Dol
lars
per
Bar
rel
The Nominal and Real World Prices of Oil
Nominal price of oil
Real price of oil, in 2018M12 price
Global Economic Trends:
The Importance of Innovation Innovation is the most important driving force of economic growth
today, especially for mature developed economies with their already-high capital-labor ratios and little, no, or even negative growth in labor-hours.
Sustained investment in intangible capital such as human capital and research and development (R&D) is essential for the occurrence of economic innovation, reflected in measured technical progress or growth in total factor productivity in an economy.
Economic globalisation can create new competitors. Economies must adapt and adjust. Intangible capital enables the creation of new comparative advantages.
The East Asian economic development experience provides an example of created as opposed to natural comparative advantage (human capital and R&D capital can substitute for natural resources).
37
Global Economic Trends:
The Importance of Innovation One indicator of the level of human capital in an economy is the
average number of years of schooling per person in the working-
age population. In the following chart, the average number of
years of schooling is compared across selected economies.
By this measure, the United States and Japan are clearly the
global leaders. South Korea and Taiwan have also been catching
up fast. Most of the other East Asian economies also have quite
rapidly increasing levels of human capital but it will take a while
before they can catch up with the levels of human capital in the
developed economies.
R&D expenditure as a percent of GDP also shows similar trends.
38
Average No. of Years of Schooling per Person
in the Working Age Pop., Selected Economies
391
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Yea
rs
Average Number of Years of Schooling of the Working-Age Population,
Selected Economies
US JapanHong Kong KoreaSingapore TaiwanIndonesia MalaysiaPhilippines ThailandChina, Mainland
R&D Expenditure as a Percent of GDP: G-7
Countries, 4 East Asian NIES, China & Israel
400.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
R&D Expenditure as a Percent of GDP: G-7 Countries, 4 NIEs, China & Israel
Canada France
W. Germany Germany
Italy Japan
U.K. U.S.
Mainland, China Hong Kong, China
South Korea Singapore
Taiwan, China Israel
Global Economic Trends:
The Importance of Innovation One indicator of the potential for technical progress (national
innovative capacity) is the number of patents created each year. In the following chart, the number of patents granted in the United States each year to the nationals of different countries, including the U.S. itself, over time is presented.
The U.S. is the undisputed champion over the past forty years, with 140,969 patents granted in 2015, followed by Japan, with 52,409. (Since these are patents granted in the U.S., the U.S. may have a home advantage; however, for all the other countries and regions, the comparison across them should be fair.)
The number of patents granted to Mainland Chinese applicants each year has increased from the single-digit levels prior to the mid-1980s to 8,166 in 2015.
The economies of South Korea and Taiwan, granted 17,924 and 11,690 U.S. patents respectively in 2015, are still far ahead of Mainland China. In contrast, the number of U.S. patents granted to Hong Kong nationals was only 601 in 2015.
41
Patents Granted in the United States: G-7
Countries, 4 East Asian NIEs, China & Israel
1
10
100
1,000
10,000
100,000
1,000,000
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Patents Granted in the United States: G-7 Countries, 4 East Asian NIEs, China & Israel
Canada FranceGermany ItalyJapan United KingdomUnited States ChinaHong Kong, China South KoreaSingapore Taiwan, ChinaIsrael
42
The Importance of Innovation:
Investment in Intangible Capital The R&D capital stock, defined as the cumulative past real
expenditure on R&D less depreciation of 10% per year, is an
useful indicator of innovative capacity. It should quite properly
be treated as capital since R&D efforts generally take years to
yield any results.
It can be shown to have a direct causal relationship to the number
of patents granted (see the following chart, in which the annual
number of U.S. patents granted is plotted against the R&D capital
stock of that year for each economy).
The chart shows clearly that the higher the stock of R&D capital
of an economy, the higher is the number of patents granted to it
by the U.S. 43
U.S. Patents Granted and R&D Capital Stocks:
G-7 Countries, 4 EANIEs, China & Israel
441
10
100
1,000
10,000
100,000
1,000,000
0 1 10 100 1,000 10,000
Nu
mb
er o
f U
.S. P
aten
ts G
ran
ted
R&D Capital Stocks, in 2016 USD billions
U.S. Patents Granted and R&D Capital Stock:
G-7 Countries, 4 East Asian NIEs and China
Canada
France
Germany
Italy
Japan
United Kingdom
United States
China
Hong Kong, China
South Korea
Singapore
Taiwan, China
Israel
45
Global Economic Trends:
The Internet Economy Internet commerce has been growing by leaps and bounds.
Amazon and Alibaba have become two of the largest
corporations in the world.
However, internet commerce has also been causing disruptions in
both developed and developing economies.
It has been affecting the financial sector and the retail sector. It
has been making the most progress in economies in which the
financial sector is relatively under-developed, such as China.
WeChat Pay and other similar set-ups relying on QR codes are
sweeping the developing world, especially where personal
checking accounts are either non-existent (e.g., in China) or rare.
They greatly facilitate payments and fund transfers.
The Number of Internet Users as a Percent of
the Population in Selected Economies
46
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
mill
ion
pers
ons
The Number of Internet Users in Selected Economies, million persons
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
The Number of Internet Users as a Percent of
the Population in Selected Economies
470
10
20
30
40
50
60
70
80
90
100
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cent
The Number of Internet Users as a Percent of the Population in Selected Economies
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
48
Global Economic Trends:
The Belt and Road (B&R) Initiative The “Belt and Road” (B&R) Initiative, consisting of the Silk Road
Economic Belt and the 21st Century Maritime Silk Road, was launched by Chinese President XI Jinping in September 2013. It is a grand, multi-country (72 by last count), multi-decade development plan with the objective of linking and transforming the economies of Asia, Europe, Africa and Oceania.
The Silk Road Economic Belt, as the Old Silk Road, links the continents of Asia, Europe and Africa together. It brings together China, Central Asia, West Asia, Middle East, North Africa, Russia and Europe. In particular, it will encompass new Eurasian Land Bridges.
The 21st-Century Maritime Silk Road is designed to connect China’s coastal regions to Europe through the South China Sea and the Indian Ocean in one route, and through the South China Sea to the South Pacific and Oceania in the other. However, the “Northern Passage”, through the Bering Strait and down to Northern Europe, has also been proposed to be part of the 21st-Century Maritime Silk Road as global warming makes the route navigable year round.
49
Global Economic Trends:
The Belt and Road (B&R) Initiative The Belt and Road (B&R) Initiative is a serious long-term
commitment of China that has been written into the Charter of the Communist Party of China.
It has been developed on the basis of the Chinese economic development experience—that connectivity and infrastructure can promote economic development through trade and direct investment.
It aims to create a peaceful and secure environment for joint development by building a trade, investment and infrastructure network connecting all B&R nations.
It emphasizes the nurturing of mutual understanding and trust and the formation of durable relationships through cultural and educational exchanges as well as industrial cooperation.
It promotes open, inclusive, balanced and green economic globalisation through enhanced regional interconnectivity.
But above all, it seeks to stimulate and create sustainable trade and investment exchanges where none exist before, thus benefitting every Belt and Road country and accelerating economic development for all.
Global Economic Trends:
The Geo-Political Uncertainties There are currently many major geo-political uncertainties. What
are the real effects of Brexit on the U.K., on the European Union and on the rest of the world? What policies will a new German Government pursue?
The possibility of trade wars with the United States—across the Pacific (China, Japan and the Republic of Korea) and the Atlantic (Germany).
The risks of protectionism, isolationism, nationalism and populism.
And then there is the continuing North Korean crisis. Other potential hot spots include the South China Sea, the East
China Sea, the Middle East, Africa and possibly the Taiwan Straits.
50
The Future of Economic Globalisation:
The Effects of Globalisation Economic globalisation has resulted in the massive growth of world trade and
through world trade world GDP. The growth of international trade led and propelled successively the growth of the
GDPs of Japan, the four Newly Industrialized Economies (Hong Kong, Singapore, South Korea and Taiwan), and Mainland China. They all adopted export-led economic growth policies in the early stages of their economic development.
This has resulted in the centre of gravity of the world economy shifting to East Asia from North America and Europe and within East Asia from Japan to Mainland China.
Economic globalisation has also partially de-coupled the East Asian economies from the U.S. and Western European economics, meaning that they can continue to grow even as the U.S. and Western European economies go into recession, albeit at slower rates.
However, economic globalisation has accelerated factor-price equalization around the world. Jobs for unskilled labor continue to move to lower-wage economies, except for tourism-related jobs. Any job that can be moved away will be moved way.
Economic globalisation has resulted in a more equal distribution of income across countries and regions (but a less equal distribution of income within each country and region).
51
The Future of Economic Globalisation:
The Benefits of Economic Globalisation The creation of winners on a global basis—voluntary
international trade is always win-win for both trading-partner countries.
The more efficient allocation of capital--Investors everywhere are moving their capital around the world to seek the highest rates of return.
The enlargement of markets--The entire world is the potential market and the entire world population have become potential customers.
The huge potential of both technological and market economies of scale can be realized through expansions, mergers, acquisitions, consolidations, and formation of strategic alliances and partnerships.
Economic globalisation enhances the returns to intangible capital.52
The Benefits of Economic Globalisation:
International Trade Economic theory tells us that whenever a new economy joins the
world economy, aggregate economic welfare of the world should increase. Moreover, the aggregate economic welfare of each country that participates in the world economy should also increase.
The basic idea is a simple one: With voluntary international trade, if there is no gain for any of the trading partner countries, no trade will take place. In any such trade, both partner countries must gain. And the gains are sufficient to compensate the potential losers within each trading partner country.
When a previously autarkic economy begins to participate in the world, international trade can only increase, and cannot decrease.
However, the introduction of new international trade transactions will necessitate domestic adjustments in each of the trading partner countries, as some domestic industries will expand while other domestic industries will contract.
53
The Distribution of Gains from Voluntary
International Trade is Indeterminate
However, while voluntary international trade always brings gains
to all trading-partner countries, the distribution of gains from
trade, or the terms of trade, are not uniquely determined by the
principles of comparative advantage alone but depends on the
relative bargaining power of the trading partner countries.
Thus, some economies will benefit more and some economies
will benefit less, even though all economies will benefit.
54
The Future of Economic Globalisation: Both
Winners and Losers are Created Domestically Moreover, imports can potentially disrupt domestic industries
through its competition with domestically produced goods,
changing the relative prices between different goods in the
economy, and displacing workers employed in these domestic
industries. Increased exports can also create losers by bidding
away resources needed by other industries. Losers will be
created in the domestic economy unless appropriate
compensation and redistribution policies are adopted by the
government. The market on its own cannot compensate the
losers from international trade.
55
The Future of Economic Globalisation: Both
Winners and Losers are Created Domestically Economic globalisation has begun to be questioned by the
common people who have not benefitted from it. The “Brexit” vote, the election of President Donald Trump in the U.S., and the rise of isolationists and protectionists in Austria, France, Germany and the Netherlands and Germany, are all testimony that many people in these countries consider themselves to be “losers” from economic globalisation and are venting their anger and frustration by voting against the establishment or the so-called “elite”.
The losers should and must be compensated if globalisation were to continue in a sustainable manner. No one should have to lose as a result of globalisation--everyone can be made better off, because in principle, the gains should more than offset the losses.
56
57
The China-U.S. Trade War: China, as a large continental economy with a huge domestic
market, has a relatively low degree of export dependence, and has
always been relatively immune to external disturbances. During
the past four decades, while the rates of growth of Chinese
exports and imports of goods fluctuate like those of all other
economies, the rate of growth of Chinese real GDP has remained
relatively stable, and in fact has always stayed positive (see the
following charts which display the quarterly rates of growth of
exports, imports and real GDP of selected Asian economies from
1997 to the present).
Exports of Goods and Services as a Share of
GDP in East Asian Economies, India & U.S.
58
0
50
100
150
200
250
Brunei
Daruss
alam
Camb
odia
Chin
a
Hong K
ong
SAR,
Chi
na
Indo
nesi
a
Japa
n
Korea,
Rep.
Lao
PDR
Maca
o SA
R,China
Mala
ysia
Myan
mar
Philip
pines
Sing
apor
e
Thai
land
Vietna
m
Taiw
an
Unit
ed S
tate
s
India
Per
cent
age
Exports of Goods and Services as a share of GDP in East Asian Economies
1980 1990 2017
59
Quarterly Rates of Growth of Exports of
Goods: Selected Asian Economies
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
Q1
1997
Q2
1997
Q3
1997
Q4
1997
Q1
1998
Q2
1998
Q3
1998
Q4
1998
Q1
1999
Q2
1999
Q3
1999
Q4
1999
Q1
2000
Q2
2000
Q3
2000
Q4
2000
Q1
2001
Q2
2001
Q3
2001
Q4
2001
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
2003
Q3
2003
Q4
2003
Q1
2004
Q2
2004
Q3
2004
Q4
2004
Q1
2005
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Q1
2018
Q2
2018
Q3
2018
An
nu
aliz
ed P
erce
nt
per
an
nu
m
Quarterly Rates of Growth of Exports of Goods: Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Taiwan Prov.of China
60
Quarterly Rates of Growth of Imports of
Goods: Selected Asian Economies
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
Q1
1997
Q2
1997
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1997
Q4
1997
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1998
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1998
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1998
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1998
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1999
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1999
Q3
1999
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1999
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2000
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2002
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2002
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2002
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2003
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2003
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2004
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2004
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2004
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2005
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2005
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2005
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2006
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2007
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2007
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2008
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2008
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2009
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2009
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2009
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2011
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2011
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Q1
2012
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2012
Q4
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Q1
2014
Q2
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2017
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2017
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2018
Q2
2018
Q3
2018
An
nu
aliz
ed P
erce
nt
per
an
nu
m
Quarterly Rates of Growth of Imports of Goods : Selected East Asian Economies
China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland Japan
61
Quarterly Rates of Growth of Real GDP, Y-o-
Y: Selected Asian Economies
-18
-15
-12
-9
-6
-3
0
3
6
9
12
15
18
21
Q1
1994
Q2
1994
Q3
1994
Q4
1994
Q1
1995
Q2
1995
Q3
1995
Q4
1995
Q1
1996
Q2
1996
Q3
1996
Q4
1996
Q1
1997
Q2
1997
Q3
1997
Q4
1997
Q1
1998
Q2
1998
Q3
1998
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1998
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1999
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1999
Q3
1999
Q4
1999
Q1
2000
Q2
2000
Q3
2000
Q4
2000
Q1
2001
Q2
2001
Q3
2001
Q4
2001
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
2003
Q3
2003
Q4
2003
Q1
2004
Q2
2004
Q3
2004
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2004
Q1
2005
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
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2006
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2006
Q1
2007
Q2
2007
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2008
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2008
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2009
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2009
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2009
Q1
2010
Q2
2010
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2010
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2010
Q1
2011
Q2
2011
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2011
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2011
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2012
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2012
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2013
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2013
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2013
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2014
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2014
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2015
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2015
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2015
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2016
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2017
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2017
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2017
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2018
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2018
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2018
An
nu
aliz
ed R
ates
in
Per
cen
t
Quarterly Rates of Growth of Real GDP, Year-over-Year: Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Taiwan Prov.of China
The China-U.S. Trade War:
Immediate Impacts The Chinese stock markets have taken a hit. This is an area where the
psychological factor dominates. As of the end of 2018, the shares on the Shenzhen Stock Exchange had on average lost 30%, Shanghai 20%, and Hong Kong 10%. In contrast, the Standard and Poor 500 Index did not suffer any loss on a whole-year (2018) basis.
At the beginning of 2019, the Chinese stock market continued to fall, until more recently. The Standard and Poor 500 Index also fell but has also begun to recover.
However, the Chinese stock markets are not a good barometer of the state of the Chinese real economy. The majority of Mainland investors are individual retail investors. They are typically short-term traders who tend to leave the market at the first sign of potential trouble. The average holding period of individual Chinese investors is less than 20 trading days. The institutional Chinese investors have a slightly longer average holding period of between 30 and 40 trading days.
It should also be borne in mind that the increase in the rates of interest in the U.S. and elsewhere would also have affected asset prices around the world negatively, so it was not the sole effect of the China-U.S. trade war. 62
The Chinese, Hong Kong and U.S. Stock
Market Indexes, Year to Date
50
60
70
80
90
100
110
120
50
60
70
80
90
100
110
120Stock Price Indices of Various Stock Exchanges, 1 January 2018 = 100
Hong Kong (Overall) Hong Kong (China Enterprise)
Shanghai Shenzhen
MSCI China S&P 500 Index
63
The China-U.S. Trade War:
Immediate Impacts The Renminbi exchange rate has also been affected by the trade war.
Relative to the US$, the Renminbi has devalued by approximately 8% since the end of January 2018 (at one time almost 10%). However, the deviation of the Renminbi central parity rate from the CFETS (China Foreign Exchange Trade System) Index, the exchange rate of a Chinese trade-weighted basket of currencies, has remained within the 3% range. Our focus should be on the central parity rate (onshore rate) rather than the offshore rate and on its relation to the CFETS Index.
The Renminbi does not follow the US$ because the U.S. accounts for only slightly more than 20% of Chinese international trade. For the Renminbi to follow the US$ when the US$ rises with respect to other currencies implies that China will raise its price of exports to all her other customers that account for 80% of Chinese exports, which makes very little sense. Similarly, when the US$ falls with respect to other currencies, if the Renminbi follows the US$, it will imply that China lowers its price of exports to all her other customers, which also makes little sense. 64
The Renminbi Central Parity Exchange Rate
and the CFETS Index (31 Dec. 2014 = 100)
65
95
97
99
101
103
105
107
109
111
113
115
Dec
-201
4Ja
n-20
15F
eb-2
015
Mar
-201
5A
pr-2
015
May
-201
5Ju
n-20
15Ju
l-20
15A
ug-2
015
Sep-
2015
Oct
-201
5N
ov-2
015
Dec
-201
5Ja
n-20
16F
eb-2
016
Mar
-201
6A
pr-2
016
May
-201
6Ju
n-20
16Ju
l-20
16A
ug-2
016
Sep-
2016
Oct
-201
6N
ov-2
016
Dec
-201
6Ja
n-20
17F
eb-2
017
Mar
-201
7A
pr-2
017
May
-201
7Ju
n-20
17Ju
l-20
17A
ug-2
017
Sep-
2017
Oct
-201
7N
ov-2
017
Dec
-201
7Ja
n-20
18F
eb-2
018
Mar
-201
8A
pr-2
018
May
-201
8Ju
n-20
18Ju
l-20
18A
ug-2
018
Sep-
2018
Oct
-201
8N
ov-2
018
Dec
-201
8Ja
n-20
19F
eb-2
019
Comparison of the Central Parity Rate and CFETS Indexes
12/31/2014 = 100
Index CFETS Currency Basket (Yuan/Currency
Basket)
Index of Central Parity Rate (Yuan/US$)
The Renminbi Central Parity Exchange Rate
and the CFETS Index
66
95
96
97
98
99
100
101
102
103
104
105
106
107
108
29-D
ec-1
7
12-J
an-1
8
26-J
an-1
8
09-F
eb-1
8
23-F
eb-1
8
09-M
ar-1
8
23-M
ar-1
8
06-A
pr-1
8
20-A
pr-1
8
04-M
ay-1
8
18-M
ay-1
8
01-J
un-1
8
15-J
un-1
8
29-J
un-1
8
13-J
ul-1
8
27-J
ul-1
8
10-A
ug-1
8
24-A
ug-1
8
07-S
ep-1
8
21-S
ep-1
8
05-O
ct-1
8
19-O
ct-1
8
02-N
ov-1
8
16-N
ov-1
8
30-N
ov-1
8
14-D
ec-1
8
28-D
ec-1
8
11-J
an-1
9
25-J
an-1
9
08-F
eb-1
9
22-F
eb-1
9
The Central Parity Rate and the CFETS Index, 29 Dec. 2017 = 100
Index of CFETS Currency Basket (Yuan/Currency Basket)
Index of Central Parity Rate (Yuan/US$)
The China-U.S. Trade War:
Immediate Impacts Maintaining the relative stability of the Renminbi exchange rate with respect
to the CFETS (China Foreign Exchange Trade System) Index, the exchange
rate of a Chinese trade-weighted basket of currencies, implies that the
Renminbi exchange rate vis-a-vis the currency of an average trading-partner
country of China will be relatively stable and that the international
purchasing power of the Renminbi will also be relatively stable.
It is in China’s interests to maintain a relatively stable Renminbi exchange
rate. It is the only way for the internationalisation of the Renminbi to
become a reality.
67
The China-U.S. Trade War:
Real Impacts Moreover, over the past ten years, Chinese dependence on exports has
been declining over the past decade. The share of exports of goods in
Chinese GDP has fallen from a peak of 35.3% in 2006 to 19.8% in
2017. The share of exports of goods to the U.S. in Chinese GDP has
also fallen by more than half, from a peak of 7.2% in 2006 to 3.4% in
2017. (See the following charts.)
During this same period, the growth of Chinese exports to the world
and to the U.S. has also slowed significantly. Chinese exports to the
world grew at an average annual rate of 22.6% in the decade 1998-
2007, but slowed to only 7.9% in the following decade, 2008-2017.
Similarly, exports to the U.S. grew at 22% per annum in the decade
1998-2007, but slowed to less than 7% per annum in the most recent
decade. Exports is no longer the engine of Chinese economic growth. 68
Chinese Exports of Goods and Services and
Goods Only as a Percent of Chinese GDP
69
Chinese Exports of Goods and Services to the
U.S. as a Percent of Chinese GDP
70
71
The China-U.S. Trade War:
Real Impacts U.S. tariffs have been imposed on US$250 billion of U.S.
imports of goods from China (arrival value, approximately equal to US$227 (250 x 10/11) billion of Chinese exports of goods to the U.S., f.o.b. or departure value), equal to approximately half of Chinese exports of goods to the U.S. in 2017.
Thus, a maximum of Chinese exports of goods amounting to approximately 1.7% (3.4%/2) of Chinese GDP will be affected.
The U.S. tariff rates range from 10% to 25% on the value of the imports from China. These rates will be prohibitive for most of the goods imported from China, especially if the 10% tariff rate is raised to 25%, as neither the Chinese exporters nor the U.S. importers have the kind of profit margins that can afford these tariffs.
72
The China-U.S. Trade War:
Real Impacts on the Chinese Economy But the direct domestic value-added content of Chinese exports to the
U.S. is less than 25%. Thus, the maximum loss in Chinese GDP, assuming that half of the exports to the U.S. is completely halted, in the first instance, may be estimated at 0.43% (1.7% x 0.25), a tolerable level, especially for an economy growing at an average annual real rate of 6.5 percent and with a per capita GDP of US$9,137 in 2017.
However, the reduction of exports leads to a reduction in the demand for domestic inputs used in their production, which in turn leads to a second-round reduction in the demand for domestic inputs used in the production of the domestic inputs.
With the indirect, that is, second-, third-, fourth- and higher-round effects of the reduction of Chinese exports kicking in, the total domestic value-added content affected will eventually increase to 66 percent cumulatively. This implies ultimately a maximum total loss in Chinese GDP of 1.12% (1.7% x 0.66). In absolute terms, this amounts to US$137 billion in 2017 prices.
The China-U.S. Trade War:
Real Impacts on the Chinese Economy A reduction of 1.1% from an expected annual growth rate of 6.5% leaves
5.4%, still a very respectable rate compared to the average of 3.7% for the world in 2018 projected by the International Monetary Fund (IMF). The IMF has recently lowered its projected rates of growth of world GDP for 2019 and 2020 to 3.5% and 3.6% respectively.
There is also the threat of a 25% tariff on the remaining US$267 billion Chinese exports of goods to the U.S. Since a 25% tariff is basically prohibitive, if implemented, it will mean the total cessation of Chinese exports of goods to the U.S. The maximum damage that can be done is 2.24% (3.4% x 0.66) of GDP, which is significant but not intolerable.
However, it seems unlikely that the tariffs on this last batch of Chinese exports to the U.S. will be implemented in full because they consist of products such as the Apple iPhones, garments and shoes and packaged re-exports of semi-conductors. The incidence of the tariffs will be mostly borne by U.S. consumers and producers including Apple Inc. (One incidental beneficiary will be Samsung of South Korea whose Galaxy cellphones compete with the iPhones.)
73
74
The China-U.S. Trade War:
Real Impacts on the Chinese Economy In the longer run, if tariffs continue on both sides, the U.S. importers
will begin to replace Chinese imports by imports from other Asian countries such as Vietnam, Cambodia and Bangladesh, and eventually perhaps even North Korea.
But the shift in the sourcing of imports away from China has already been occurring since 2010, because of the rise in labour costs in China and because of the appreciation of the Renminbi. This is similar to the earlier shift of the sources of U.S. imports of apparel from Hong Kong, South Korea and Taiwan to Mainland China (see the following chart). The new U.S. tariffs will accelerate this process.
The ASEAN and South Asian countries may benefit, but it is really hard to predict by how much because the supply chains today are so internationalised. However, it is unlikely, in most cases, that the tariffs will stimulate new domestic production in the U.S.
The Distribution of U.S. Apparel Imports by
Countries of Origin
75
The China-U.S. Trade War:
Real Impacts on the U. S. Economy The degree of dependence of the U.S., a large continental
economy, on exports is even lower than that of China’s. U.S. exports of goods and services combined as a share of GDP was 12.12% in 2017. The exports of goods alone as a share of GDP was only 8.01%.
The shares of U.S. exports of goods and services and goods alone to China in GDP was 0.97% and 0.67% (US$130 billion) respectively in 2017, much lower than those of Chinese exports to the U.S. However, the shares of U.S. exports of both goods and services and goods only to China have been rising over time.
At the present time, Chinese tariffs have been imposed on US$110 billion of U.S. exports of goods, with the first US$50 billion at rates up to 25% and the subsequent US$60 billion at rates ranging between 5% and 10%.
76
U.S. Exports of Goods and Services and Goods
Only as Percent of U.S. GDP
770
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Per
cent
Exports of Goods & Services and of Goods as a Percent of the U.S. GDP
Exports of Goods and Services as a Percent of GDP
Exports of Goods Only to the World as a Percent of GDP
U.S. Exports of Goods and Services and Goods
Only to China as Percent of U.S. GDP
780.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Per
cent
U.S. Exports of Goods & Services and Goods Only to China
as Percent of U.S. GDP
Exports of Goods and Services
Exports of Goods
The China-U.S. Trade War:
Real Impacts on the U. S. Economy The direct domestic value-added content of U.S. exports of goods to
China may be estimated to be 50.8%. Thus, the maximum loss in the
U.S., assuming that all of the exports to China is completely halted by
the tariffs, may be estimated in the first instance at 0.34% (0.67% x
0.508), less than the initial impact on Chinese GDP of 0.43%.
Moreover, it is unlikely that all of the U.S. exports of goods will be
halted; for example, computer chips will continue to be imported by
China in large quantities in the medium term. (The price elasticity is
low.) Suppose only half of U.S. exports of goods to China is halted, it
would amount to a loss of U.S. GDP of 0.17%. This is not significant
for the U.S. economy, which grew 2.9% in 2018 (2.6% in 2018Q4), as
a whole. U.S. GDP per capita is approximately US$60,000. The U.S.
economy can easily weather a reduction of 0.17% in its rate of growth.79
80
The China-U.S. Trade War:
Real Impacts on the U. S. Economy With the indirect, that is, second-, third-, fourth- and higher-
round effects of the reduction of U.S. exports of goods kicking in, the total domestic value-added affected increases to 88.7% cumulatively. This implies ultimately a total loss in U.S. GDP of 0.30% (0.67%/2 x 0.887), assuming that half of U.S. exports to China will be halted.
In absolute terms, this amounts to US$58 billion (0.30 x 19.4 trillion) in 2017 prices, much less than the estimated Chinese loss in terms of GDP of US$137 billion.
However, the U.S. has a significant trade surplus in services with China, estimated to be US$40 billion by the U.S. Government but US$54 billion by the Chinese Government for 2017. This surplus may be in jeopardy if China-U.S. relations deteriorate further.
Projections of the Future: Near-Term Forecasts
by International Organizations
81
2019 2020 2021 2019 2020
World 2.9 2.8 2.8 3.5 3.6
China 6.2 6.2 6 6.2 6.2
the U.S. 2.5 1.7 1.6 2.5 1.8
EU 1.6 1.5 1.3 1.6 1.7
Japan 0.9 0.7 0.6 1.1 0.5
India 7.5 7.5 7.5 7.5 7.7
World Bank IMF
Real GDP Growth Forecasts Real GDP Growth Projections
Projections of the Future: Long-Term Forecasts
of the Chinese and the U.S. Economies It is assumed that the Chinese economy will continue to grow above
6% per annum for a few years, declining gradually to between 5% and 6%, and that the U.S. economy will grow at an average rate of 3% per annum between now and 2050.
In 2018, the Chinese economy grew 6.6%. The 2019 target growth rate for the Chinese economy is between 6% and 6.5%. In 2018, the U.S. economy grew at 3%. But both the U.S. Federal Reserve Board and the U.S. Congressional Budget Office expect 2.3% growth for 2019.
It may be thought that the Chinese economy will be unable to sustain an approximately 6% average annual rate of growth for such a long time. But given the still relatively low level of real GDP per capita in China, such a rate of growth should be possible for at least a couple of decades (see the following chart in which the experiences of China, Japan and the U.S. are compared.)
The projections of Chinses and U.S. real GDP and real GDP per capita between now and 2050 are presented in the following charts.
82
83
Growth Rates vs. Levels of Chinese, U.S. and
Japanese Real GDP (2018 tril. US$)
-30
-20
-10
0
10
20
30
0 10 20 30 40 50 60
Perc
ent
Real GDP per Capita, thousand USD, in 2018 prices
Rate of Growth of Real GDP vs. Real GDP per Capita (in 2018 US dollar)
China USA Japan
Chinese National Saving and Gross Domestic
Investment as Percents of GDP
8410
15
20
25
30
35
40
45
50
55
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Per
cent
Chinese National Savings and Gross Domestic Investment as a Percent of GDP since 1952
Savings Rate Investment Rate
85
Projections of the Chinese and the U.S.
Economies In his work report to the Nineteenth National Congress of the
Communist Party of China, President XI Jinping identified several milestones in his speech at the Nineteenth Party Congress at 2020, 2035 and 2050.
The first milestone is to become a moderately well-off society by 2020. Our projections show that by 2020, Chinese real GDP per capita (in 2018 prices) will exceed US$10,582 (compared to US$65,541 for the U.S.).
Our projections also show that by 2033, Chinese real GDP will surpass U.S. real GDP (US$32.7 trillion versus US$31.9 trillion), making China the largest economy in the world. However, in terms of real GDP per capita, China will still lag behind significantly, with US$22,088 compared to US$89,363 for the U.S.
By 2050, Chinese real GDP will reach US$83 trillion compared to US$53 trillion for the U.S. In terms of real GDP per capita, China will reach US$53,408, still below the current (2018) level of U.S real GDP per capita of US$62,609, compared to US$138,693 for the U.S.
86
Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
21
24
-5
0
5
10
15
20
25
30
35
40
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Percent
USD
tri
llion
s, 2
018
pri
ces
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$)
Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
87
Actual and Projected Chinese and U.S. Real GDP/Capita
and Their Annual Rates of Growth (1,000 2018 US$ & %)
-4
-2
0
2
4
6
8
10
12
14
16
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
percentU
SD th
ousa
nd, 2
018
pric
es
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
88
Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
-20
-10
0
10
20
30
40
50
60
70
80
90
100
110
120
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Percent
USD
tri
llion
s, 2
018
pri
ces
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$) Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
89
Actual and Projected Chinese and U.S. Real GDP/
Capita and Their Rates of Growth (1,000 2018 US$)
-4
-2
0
2
4
6
8
10
12
14
16
-40
-20
0
20
40
60
80
100
120
140
160
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
percentU
SD th
ousa
nd, 2
018
pric
es
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
Concluding Remarks The principal problem of economic globalisation is one of the
domestic distribution of the gains within each country and region. (Of course there is also the issue of the distribution of gains among the trading-partner countries, but that is a different problem altogether.) It is the responsibility of each of the domestic governments to try to redistribute part of the gains from the winners to the losers, so that everyone benefits. There should be enough overall net gain to make this possible. However, the free market on its own will not be able to do it. Government intervention is necessary.
This will include the provision of transitional and if necessary long-term income support to the displaced workers and of re-training and re-employment assistance.
90
Concluding Remarks Can economic globalisation continue in the future? Without
continuing globalisation, can the currently developing economies
become developed?
If the individual governments can ensure that that every one of
their respective citizens wins under economic globalisation, that
no net losers are created under continuing globalisation, then
there will be popular support for continuing globalisation.
President XI Jinping has said on numerous occasions that China
is committed to supporting economic globalization and an open,
rule-based international trade system. China’s Belt and Road
Initiative does support continuing economic globalisation.
91
92
Concluding Remarks
The centre of gravity of the world economy has been and will
continue to be gradually shifting to East and South Asia. The
centre of gravity of the East Asian economy has been gradually
shifting to China.
The Chinese and East Asian economies have been partially de-
coupled from the United States and Europe.
The Chinese economy will catch up to the U.S. economy in terms
of aggregate GDP some time around 2033, plus or minus a
couple of years. However, it will take the end of the Twenty-
First Century before the Chinese economy can catch up to the
U.S. economy in terms of per capita real GDP.